Why Are We Letting Polluters Regulate Themselves Instead of Letting the EPA Do Its Job?

On February 17, Obama’s Environmental Protection Agency (EPA) did something audacious that sent shockwaves throughout the coal industry: Lisa Jackson, the agency’s administrator, announced that it would take a fresh look at a Bush administration memo preventing the regulation of CO2 emissions from coal-fired power plants and other sources.

Simply stating she was going to reconsider former EPA Administrator Stephen Johnson’s December 18, 2008, memorandum was enough to put at least 17 coal-fired power plants currently in the pipeline on hold. These power plants, had they been approved, would have produced roughly 12,000 megawatts of power — enough to provide the needs of 3.6 million homes — and released about 84 million tons of CO2 per year.

What does this mean? Let’s put it in context: 84 million tons of CO2 is roughly equivalent to 2 percent of all U.S. greenhouse gas emissions, and about 4 percent of all emissions from electricity the United States produced in 2007. In other words, the mere threat of regulation meant a previously expected 2 percent increase in U.S. greenhouse gas emissions was suddenly much less certain.

This promising signal was just one of several from the Obama administration’s earliest days. Sadly, the word now from the White House is that President Barack Obama wants Congress to send him a “market-based cap” on greenhouse gas emissions. Ironically, it’s that market-based approach — and all that goes with it — that may actually rob the administration of its most powerful tool in this battle for climate stability: EPA regulation.

Now, Obama is getting what he asked for: In June, the U.S. House of Representatives passed the American Clean Energy and Security Act of 2009, otherwise known as the Waxman-Markey bill. This legislation pledges to reduce greenhouse gas emissions by about 2 percent below 1990 levels by 2020 — if all goes well. But there’s a lot that could go wrong.

As a tradeoff to gain support from industry for this bill, lawmakers have agreed to strip the EPA of its authority to regulate greenhouse gas emissions from all power plants, including coal burners, under the Clean Air Act. In place of regulatory oversight, the bill allows for a free market in pollution allowances between industries. Put simply, coal-fired power plants and other large burners of energy would have a “right to pollute,” which they could buy and sell with other large consumers of energy. And because these pollution rights have a cash value and would be given away for free over the next several decades, polluters will make a handsome profit from their pollution.

EPA’s weakened authority is just the first of several bonuses for polluters. Under the Waxman-Markey bill, polluters could purchase carbon “offsets” — 2 billion tons of them each year — should they not be able to meet their cap in greenhouse gas emissions via reductions or carbon trades.

Regulated carbon reductions at power plants are the optimal-value approach: straightforward, uncomplicated, easy to quantify. Next down the value chain would be carbon trades, where Polluter A, who has exceeded his pollution target, trades with Polluter B, who has reduced his pollution by more than is required by law. Polluter A might find it too expensive to reduce his pollution according to strict regulations, so pays Polluter B for the right to claim Polluter B’s share of pollution reductions.

Further down the value chain would come carbon offsets, a sort of “subprime” carbon trade. If Polluter A finds trading with Polluter B to be too challenging, Polluter A can instead claim carbon credits by buying carbon offsets. A carbon offset is “subprime” because, unlike an emissions reduction, it is hard to prove it would not have taken place anyway. For example, some carbon offsets are claimed from methane that is captured and burned at a waste dump, transforming it into carbon dioxide, a less potent global warming agent. Other carbon offset sellers claim they are sequestering CO2 in fast-growing eucalyptus plantations — and claim that this CO2, which would otherwise be emitted in the air, is now being stored in trees. But local regulations often require waste dumps to burn capture their methane. And trees grow (and die) without intervention from humans.

If the climate bill passes in its current form, this “subprime carbon” market would explode, while the optimal regulatory approach would wither. The Waxman-Markey bill would allow polluters to “offset” their emissions via these questionable commodities, and even to bank their pollution allowances — meaning, if they “underpollute” one year, they are free to “overpollute” the next, so long as the difference between the two approximates their annual target. This banking of emissions credits, coupled with so many carbon offsets, invites market speculators (those who bet on the future price of a commodity) and derivatives traders to turn our planet’s carbon cycling capacity into a lucrative investment opportunity.

To make matters worse, in a bid to win passage of the bill, on June 23 the House Agriculture Committee succeeded in ensuring that the Department of Agriculture would wield oversight over carbon offsets generated by the agricultural industry, rather than the EPA. In the offsets world, agricultural offsets are akin to “junk carbon.” Why?

First, because CO2 in this industry doesn’t come out of a smokestack or a tailpipe. It comes from soil, application of certain fertilizers, and animals’ front and back ends. Handing oversight of this amorphous market in flatulence and other gases to the USDA, which is notoriously cozy with corporate farming interests, all but assures we’ll be minting yet more money for agribusiness, which already reaps billions of dollars every year in farm subsidies. According to The Wall Street Journal, the Energy Information Administration estimated that the market for agricultural offsets could total up to $24 billion annually. That sum would dwarf all other U.S. farm subsidies combined.

Second, because about 1,000 additional workers would need to be hired just to oversee these offsets, it would create an untenable bureaucracy.

Recent studies suggest these 2 billion tons of offsets — rather than having “integrity,” as Waxman and Markey had pledged — will instead become the “counterfeit” carbon so many climate activists feared would overload the system.

As the bill proceeds through the Senate for markup, EPA authority should be restored. Remember, the mere threat of regulation from the EPA didn’t require offsets, markets in carbon futures, or SEC bureaucracy to deliver a staggering result: A 2 percent increase in U.S. greenhouse gas emissions stalled.

Furthermore, if “junk” agricultural offsets are allowed, the EPA — not the USDA — should oversee these trades to avoid the inevitable pressure from agribusiness to turn offsets into yet another subsidy for business as usual.

But Obama should go one step further than simply restoring EPA authority to its rightful place. He should make the case for an even stronger EPA, one that could cut U.S. coal-fired power plant emissions by over 50 percent by simply requiring that all coal burners be retrofitted to burn natural gas. A stronger EPA could weigh in with a louder voice and ensure that no more of our taxpayer dollars subsidize climate change via our development banks and export credit agencies. A stronger EPA could be empowered to better implement the many international treaties we are already signatory to — such as the UN Convention on Biological Diversity or the UN Convention to Combat Desertification — treaties that could help us take bold action on climate change internationally, even in the absence of a strong outcome at the UN climate negotiations in Copenhagen this December.

If we took a regulatory approach, instead of a “market-based” one, or, at the very least, if we didn’t scrap our strongest regulatory tools and removed the “subprime” and “junk” carbon from the mix, we might actually get this problem solved. Now there’s something truly audacious.